Question

Directions: To answer the following questions, please reference the Etsy 2018 Annual Report 1. Convert the Consolidated Statement of Operations (found in Item 8) into a common-size statement. (0.5 pts) 2. Looking at the Consolidated Statement of Operations, please answer the following: (1.5 pts) a. Has 2018 Gross Profit improved vs. 2017? If so, what could be some drivers that improved Gross Profit? Yes, it improved. b. In which year has Etsy improved its total operating expenses? In that year, which operating expense saw the largest improvement vs. the prior year? Hint: Look at total operating expense as a % of revenue as well as calculate the year over year change to determine if it's improving (e.g. getting smaller as a % of revenue or decreasing vs. the prior year) c. What is the 3-year Revenue CAGR? (603693-364964)^(1/2)-1= 28.6% 3. Calculate Etsy's 2018 Net Working Capital. Based on the result, what can one infer about Etsy's liquidity? (1 pt.)

Answer 1

	Amounts in $ thousands	common size income statement (in %)
	2018	2017	2016	2018	2017	2016
revenue	603693	441231	364967	100.00%	100.00%	100.00%
cost of sales	190762	150986	123328	31.60%	34.22%	33.79%
gross profit	412931	290245	241639	68.40%	65.78%	66.21%
operating expenses
marketing	158013	109085	82248	26.17%	24.72%	22.54%
product development	97249	74616	55083	16.11%	16.91%	15.09%
general and administrative	82883	91486	86180	13.73%	20.73%	23.61%
asset impairment	0	3162	551	0.00%	0.72%	0.15%
total operating expenses	338145	278349	224062	56.01%	63.08%	61.39%
income from operations	74786	11896	17577	12.39%	2.70%	4.82%
other (expense) income
interest expense	-22178	-11130	-7204	-3.67%	-2.52%	-1.97%
interest and other income	8957	2394	1702	1.48%	0.54%	0.47%
foreign exchange (loss) gain	-6487	29105	-14951	-1.07%	6.60%	-4.10%
total other (expense) income	-19708	20369	-20453	-3.26%	4.62%	-5.60%
income (loss) before income taxes	55078	32265	-2876	9.12%	7.31%	-0.79%
benefit (provision) for income taxes	22413	49535	-27025	3.71%	11.23%	-7.40%
net income (loss)	77491	81800	-29901	12.84%	18.54%	-8.19%

Yes, gross profit increased from 65.78% in 2017 to 68.40% in 2018. The reason being increase in revene from $441,231 thousands 2017 to $603,693 thousands in 2018. Also, cost of goods sold declined from 34.22% in 2017 to 31.60% in 2018.

Operating expense as a percent of revenue improved in 2018 and was 56.01%. The expense which improved was general and administrative expenses.

working capital	current assets - current liabilities
	2018 ($000)	2017 ($000)
total current assets	680289	439264
total current liabilities	112062	102477
working capital	568227	336787

working capital increased by $231440 which indicates that company is financial sound.